Chancellor Philip Hammond has said that not all government departments should expect their budgets to rise in the upcoming Spending Review, despite his repeated promises to increase spending on public services and bring austerity to an end.
In his Budget speech last October, chancellor Philip Hammond said austerity was “coming to an end”, following years of cuts to public services.
But in a letter to the Treasury Committee on 28 March, he said ending austerity was “not solely” about higher public spending.
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“All Spending Reviews are about prioritisation and efficiency, and it would be odd to define ending austerity as meaning that every department sees an annual real-terms increase in its budget,” he said.
The 2018 Budget set out plans for 1.2% annual growth in day-to-day departmental spending between 2019-20 and 2023-24, following average annual cuts of 3% from 2010 to 2015 and 1.3% from 2015 to 2020.
But Hammond’s letter, made public last week, appeared to confirm predictions that some departments will see their budgets cut. The 1.2% figure includes the government’s NHS funding boost, which when removed from the total pulls average real-terms growth in departmental spending down to zero.
In its report on the Budget in February, parliament's Treasury Select Committee said the chancellor must explain what he meant by ending austerity “in more measurable terms, especially as he will face more difficult choices at future Budgets for how to fund such a pledge”.
Hammond said his claim was justified because ending austerity was not only about public spending, but also “delivering wage growth and leaving more money in people’s pockets”. He was doing this by increasing the national living wage and the income tax personal allowance, he said.
He said not all departments had received annual budget increase in Spending Reviews even before austerity began in 2010, and to assume that would be the case now would be using a “poor definition of ending austerity”. Instead, he said the review would focus on value for money, by looking at “how we invest most effectively in our economy through a renewed focus on delivering high-quality outcomes”.
Hammond’s letter was published alongside the government’s response to the Treasury Committee’s February report, which questioned both the austerity claim and Hammond’s assertion that the UK stood to secure a “deal dividend” if it reached a withdrawal agreement with the EU.
In the Budget, Hammond said the UK would receive a windfall on securing a Brexit deal as it would release some of the fiscal headroom he was holding in reserve, and give businesses more confidence to invest in the country.
But the MPs said Hammond was merely talking about “avoiding something really very bad”. They acknowledged that providing more certainty about Brexit could encourage business investment to pick up, but said this could not credibly be called a dividend.
In its response, the government defended the claim, saying analysis by the Bank of England and the Office for Budget Responsibility suggested that “all other things equal, lower uncertainty and looser financial conditions could boost GDP growth” in 2020 and 2021.
“The government notes the committee’s acknowledgment that business confidence and investment may improve as uncertainty is resolved on EU exit,” the response said.
The response also confirmed the Treasury had put new processes in place to avoid future delays in the Budget process, after it failed to stick to the timetable it had agreed with the OBR at the beginning of the forecasting process.
The Treasury had made changes after working with the OBR to review the forecasting process, which will mean policy and forecast information is delivered earlier in future, the response said.
Committee chair Nicky Morgan said the Treasury’s engagement with the OBR was “welcome”.
She added: “One of the headlines of Budget 2018 was the chancellor’s expansive and imprecise claim that austerity is coming to an end.
“It’s noteworthy, therefore, that the chancellor felt the need to say that it was odd to define ending austerity as meaning that every department sees an annual real-terms increase in its budget.
“It’s also noteworthy that the chancellor said that ‘ending austerity is not solely about higher public spending’.”